RPF0627-Asset_Protection_Planning_for_Mere_Mortals_-_Part_9_-_Health_and_Education_Account_Exemption_Planning
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00:00:30.360 | Welcome to Radical Personal Finance, a show dedicated to providing you with the knowledge, skills, insight, and encouragement you need to live a rich and meaningful life now,
00:00:37.260 | while building a plan for financial freedom in 10 years or less.
00:00:40.300 | Today, we continue with our Asset Protection Planning for Mere Mortals series.
00:00:44.900 | This is part 9 of that series, wherein we discuss health and education account exemption planning.
00:00:50.980 | A few moments of preamble here.
00:00:52.780 | When I began this series, I wanted to really focus it in on useful advice for Mere Mortals.
00:00:58.960 | And when I use that term, I'm simply meaning relatively ordinary people.
00:01:03.760 | Ordinary people who are earning wages or have profits from an ordinary business.
00:01:08.500 | And those wages, I'm assuming, are in the thousands, tens of thousands, hundreds of thousands of dollars.
00:01:14.240 | Not particularly in the millions of dollars of annual earnings.
00:01:17.700 | And normal amounts of wealth for somebody who is proficient at accumulating capital. Hundreds of thousands of dollars, millions of dollars.
00:01:24.620 | That's where this series is really focused.
00:01:27.220 | I'm specifically ignoring the very high-income earners.
00:01:31.580 | Not because these techniques cannot be used by a high-income earner.
00:01:35.620 | If you're making $30 million per year, you can still use these techniques.
00:01:39.700 | It's just that these techniques don't accomplish what you need to accomplish.
00:01:43.900 | They're just not big enough to really make a big difference in your personal scenario.
00:01:50.700 | Because the limits are, by comparison to how much money you have to protect, they're not useful.
00:01:57.380 | They're just not big enough.
00:01:58.780 | For example, today we're talking about health and education accounts.
00:02:03.280 | And I'm going to talk to you about health savings accounts in a moment.
00:02:06.220 | Where you can put $7,000 a year into that.
00:02:08.660 | Well, $7,000 a year for somebody who's making $100,000 a year can be a very meaningful contribution.
00:02:14.700 | That's 7%.
00:02:15.700 | $7,000 a year for somebody who's making $20 million a year is not at all meaningful.
00:02:20.700 | It's not that they can't still make that contribution.
00:02:23.140 | It's just that it simply is irrelevant to the most important planning techniques that are available.
00:02:28.420 | So that's what I mean by mere mortals.
00:02:30.620 | When I began this series, I talked about asset protection extremely broadly.
00:02:34.420 | I encouraged you to think about protecting the things that are most important to you.
00:02:37.920 | In a very broad sense.
00:02:39.220 | But of course, when we use this term, asset protection planning, we're usually thinking about your financial assets.
00:02:43.420 | How to protect your money and your financial assets from the risk of creditors.
00:02:48.720 | That's the common accepted use of this term.
00:02:50.720 | And so then in part two, I zoomed in on that.
00:02:53.720 | We talked about the legality and morality of asset protection planning.
00:02:58.720 | And then I started talking about exemption planning.
00:03:00.720 | Because exemption planning, which is the practice of owning assets that have some kind of built-in statutory protection.
00:03:06.720 | From lawsuits or from creditors or from bankruptcy court.
00:03:10.720 | Exemption planning is the simplest way to get into asset protection planning.
00:03:15.720 | In exemption planning, we've talked about using the homestead exemption to protect your house.
00:03:20.720 | We've talked about the pension and retirement account exemptions to protect your IRAs, your 401(k)s.
00:03:25.720 | We've talked about exemption planning for life insurance policies.
00:03:28.720 | Both the death benefits of those policies and also inside buildup of cash values.
00:03:34.720 | If you have a cash value type policy.
00:03:36.720 | We've talked about annuities extensively.
00:03:39.720 | And today we're going to continue with the discussion of health and education accounts.
00:03:43.720 | And then I plan in my series, I plan to also next cover in this series the personal property exemptions.
00:03:49.720 | As well as an additional episode on wage exemption planning.
00:03:53.720 | And that should wrap up the exemption planning.
00:03:55.720 | Because these are things that anybody can do without an attorney.
00:03:58.720 | Just any normal person.
00:03:59.720 | These accounts that are exempt, these assets that are statutorily exempt from the claims of creditors.
00:04:05.720 | Are things that are available to you just by knowing how useful they are.
00:04:09.720 | There are many other assets that, sorry, strategies that can be discussed.
00:04:13.720 | We can talk about titling your assets into protective entities of various kinds.
00:04:18.720 | We can talk about equity stripping assets and protecting them in many ways.
00:04:22.720 | And unbundling the rights of ownership of property.
00:04:26.720 | So that you can enjoy the use of property without actually having the ownership of the property, etc.
00:04:31.720 | I'm not sure how far I'm going to take this series.
00:04:33.720 | But this exemption planning is the meat and potato stuff that is really useful for mere mortals.
00:04:39.720 | Now I need to give you one important caveat and listen carefully to me.
00:04:44.720 | In this show I'm going to speak very broadly.
00:04:47.720 | And I'm going to smooth over a lot of important details.
00:04:50.720 | There are a lot of rules in exemption planning.
00:04:54.720 | And the rules are different depending on whether we're talking about creditor protection.
00:04:58.720 | In the case of a lawsuit or someone becoming a judgment creditor by winning a lawsuit.
00:05:03.720 | And that's different than bankruptcy court, protecting our assets through bankruptcy court.
00:05:07.720 | There are many, many rules, especially those that relate to bankruptcy.
00:05:10.720 | And those rules are very technical.
00:05:12.720 | For example, who is the beneficiary of the 529 plan when you were putting money into it?
00:05:17.720 | When was the contribution made?
00:05:19.720 | 365 days before the bankruptcy court, 720 days, etc.
00:05:24.720 | You need to research these rules for your particular state.
00:05:27.720 | Because some of them are federal, some of them are statewide.
00:05:30.720 | I'm just going to speak very broadly so that you can have enough of an idea that this is useful stuff.
00:05:35.720 | And you should go and research your state.
00:05:38.720 | But if you don't do something right in the details, don't blame me.
00:05:43.720 | First of all, I'm just some random guy giving advice to you on the internet.
00:05:47.720 | But I guess probably I shouldn't say that advice, right, if we get into all the semantics.
00:05:52.720 | I'm a random guy spouting out entertaining stuff on the internet that will hopefully help you to do your own research.
00:05:57.720 | That's how you should approach this.
00:05:59.720 | Now, let's talk first about health accounts, and then we'll move to education accounts.
00:06:03.720 | There are three basic types of health accounts that I want to talk about.
00:06:06.720 | First, health savings accounts, and by extension, medical savings accounts.
00:06:10.720 | Of course, MSAs are not used anymore.
00:06:13.720 | Very few people have them, so these rules apply to MSAs.
00:06:17.720 | But I'm just going to ignore that because they're just really not relevant in today's world.
00:06:20.720 | At least I don't see anybody really maintaining these accounts, even though they technically can.
00:06:24.720 | So HSAs, health savings accounts, FSAs, flexible spending accounts, and I'll briefly touch on HRAs, health reimbursement arrangements.
00:06:31.720 | But let's start with HSAs.
00:06:33.720 | HSAs are one of the more useful accounts that you can use.
00:06:36.720 | And they're not a type of account that many people think much about when it comes to credit protection or asset protection.
00:06:43.720 | By way of review, an HSA is an account into which you can contribute money if you have an associated high deductible health plan.
00:06:51.720 | And your contributions to those accounts can be tax advantaged.
00:06:55.720 | The HSA allows you to contribute money to the account pre-tax, which is useful.
00:07:01.720 | The money grows with no taxes on earnings.
00:07:04.720 | The money can be spent out of the account for qualified medical expenses, and it can be spent without taxes, which means that that money is completely income tax free.
00:07:14.720 | And at retirement age, once you're past 65, if you are no longer -- if you don't need the money for medical expenses, you can take it out.
00:07:22.720 | And at which time you would pay income taxes on the money, but you would not pay any penalty taxes.
00:07:27.720 | So in that way, it functions something like an IRA in that case.
00:07:31.720 | HSAs have reasonable contribution limits.
00:07:34.720 | You can contribute as an individual in 2019 $3,500 to the account.
00:07:39.720 | For a couple married filing jointly, it's $7,000 to the account.
00:07:43.720 | So that can be useful to many people.
00:07:45.720 | And they have a number of other advantages.
00:07:47.720 | For example, an HSA doesn't have the disadvantage of having to have required minimum distributions.
00:07:53.720 | So you can accumulate the money in the account for a very long period of time, unlike an IRA, which has required minimum distributions.
00:07:59.720 | Other advantages of an HSA involve their exemptions from payroll taxes, from your employment taxes.
00:08:06.720 | If you contribute to an HSA through an employer deduction, the money that goes into it is completely exempt from your employment taxes.
00:08:15.720 | And that saves you an effective 7.65% of taxes on wages that are usually assessed to you by your employers.
00:08:23.720 | This can be very useful to also not only avoid the income tax, but also to avoid your employment taxes if you have an HSA with your employer.
00:08:32.720 | And I think these accounts are particularly interesting when you apply some of the more extreme uses.
00:08:39.720 | For example, I think my friend Brandon over at the Mad Scientist has done really a yeoman's work on enhancing these accounts
00:08:46.720 | and using them in ways that the legislators never intended to help people who are involved in early retirement.
00:08:53.720 | The basic strategy there is that you accumulate money in the health savings account, and you save and document all of your medical expenses,
00:09:01.720 | but you don't immediately take the money out of the account when you incur the medical expenses.
00:09:05.720 | Rather, you use other sources of income, other savings, to pay for those medical expenses.
00:09:11.720 | So you simply accumulate all of your medical expenses over time, and then at some point in the future when you're ready,
00:09:17.720 | you can just simply take your distributions and at that point in time use your expenditures, use your receipts,
00:09:23.720 | to make sure that that money is received to you completely income tax-free, even though it's before 65,
00:09:29.720 | and even though you're taking it perhaps 30 years after the original medical expense was made.
00:09:35.720 | I think it's a great strategy, and it's a good way of exploiting the rules.
00:09:40.720 | Now, are HSA accounts protected from creditors?
00:09:44.720 | And here, the answer, as I tried to show you, is it varies depending on whether you're talking about bankruptcy or creditor protection.
00:09:50.720 | Now let's talk about protection from creditors.
00:09:54.720 | There is a federal law that protects a health savings account if that health savings account is set up with your employer.
00:10:01.720 | So this is another benefit to establishing an HSA directly through your employer rather than as an individual.
00:10:08.720 | The first benefit, of course, being that your HSA contributions, if done through your employer, can be exempt from payroll taxes.
00:10:15.720 | So there is a federal law that protects these accounts if it's set up by an employer.
00:10:19.720 | Now, if it's not set up by an employer, then it will depend on your specific state.
00:10:24.720 | And in some states, yes. I have not researched all the states. You can do that.
00:10:29.720 | But I would bet that if I did go through and do the exhaustive research on every state,
00:10:33.720 | it would basically follow the general tone of your state's laws.
00:10:36.720 | If you live in a state that is very focused on exempting certain kinds of accounts from the claims of creditors with significant generosity,
00:10:45.720 | such as my state, Florida, then your state probably would protect HSAs.
00:10:50.720 | My state, Florida, completely protects HSAs from the claims of creditors in the HSA funds.
00:10:54.720 | If you are in a state that does not work with that general theory that applies to creditor protection, my guess is it's probably no.
00:11:04.720 | In which case, you should make other plans or consider moving.
00:11:08.720 | So that's for creditor protection.
00:11:10.720 | Generally, probably so, if it's set up with an employer, it falls under the coverage of a federal law.
00:11:17.720 | And if it's not set up with your employer, or you just have taken it independent of your job, research your particular state.
00:11:24.720 | Now, in bankruptcy, the situation is a little bit more clouded on HSAs.
00:11:30.720 | And also, the reason that I talk both about creditor protection and bankruptcy is first because the laws are complementary,
00:11:38.720 | but also because although most of us are thinking first about creditor protection,
00:11:43.720 | we have to acknowledge that any one of us could wind up in bankruptcy.
00:11:47.720 | Even if you never borrowed money, the most extreme form of a creditor who wins a lawsuit against you becomes a judgment creditor.
00:11:54.720 | The most extreme form of their ability to collect on that debt is to force you into involuntary bankruptcy.
00:11:59.720 | If they can possibly do that by working through the machinations of the legal system to force you into involuntary bankruptcy,
00:12:05.720 | then they can force your bankruptcy estate to disgorge assets, and they can file their claim on that bankruptcy estate and collect the money.
00:12:13.720 | So, we always need to think about bankruptcy in addition to just simply thinking about, "Hey, they're coming after us with a lawsuit."
00:12:21.720 | So, in bankruptcy, the situation is a little bit clouded.
00:12:25.720 | There is an interesting legal argument between whether an HSA is a trust account versus an insurance plan,
00:12:32.720 | and this has to do whether the particular assets are going to be part of your bankruptcy estate or not.
00:12:42.720 | And that's where it's going to matter.
00:12:45.720 | Now, the federal bankruptcy exemptions do not protect HSA funds in bankruptcy.
00:12:51.720 | So, that's important.
00:12:52.720 | The federal bankruptcy exemptions, if your state uses those, do not protect HSA funds in bankruptcy.
00:12:58.720 | But your state might provide a specific exemption.
00:13:01.720 | I know that the states of Florida, Mississippi, Oregon, Tennessee, Texas, and Virginia do.
00:13:06.720 | I found that in one article in researching the subject.
00:13:09.720 | It might be that other states do as well.
00:13:11.720 | So, you will have to research that carefully for yourself to understand whether or not your HSA would be protected in bankruptcy.
00:13:20.720 | But the net summary, again, this is why I began with the preamble that I'm speaking very broadly,
00:13:25.720 | the net summary is that HSAs and money that is accumulated inside of a health savings account is indeed protected in many or most situations from the claims of creditors.
00:13:37.720 | That can make this particular account very useful because if you have an account that you can contribute $7,000 into per year,
00:13:44.720 | and if you can leave that money alone and have it just simply accumulate over many decades,
00:13:48.720 | this can be very significant.
00:13:50.720 | And with the flexibility of the account, this legislation that protects the HSA can be quite useful.
00:13:56.720 | Let's move on to the flexible spending account.
00:13:58.720 | Flexible spending account, of course, is one that many more people are involved with and understand.
00:14:03.720 | Basically, a flexible spending account allows you to make a contribution to the account each year.
00:14:08.720 | Sometimes your employer makes a contribution, sometimes you do it, and then you have to use the funds in it for medical expenses.
00:14:14.720 | After the passage of the 2013 Affordable Care Act, popularly known as Obamacare, there were a couple of changes made to FSAs.
00:14:23.720 | And FSAs, those changes were that there was a low contribution limit established.
00:14:28.720 | Currently, I think it's $2,700 per year.
00:14:31.720 | And you have the requirement that those FSA funds have to be used and spent by the end of the year.
00:14:37.720 | And so most people don't put very much into this because you can't.
00:14:40.720 | And since you can't accumulate it, the account is generally not going to be all that much money.
00:14:46.720 | You just can't.
00:14:48.720 | If you're starting over from zero every day, the most we're talking about here is $2,700,
00:14:52.720 | which to mere mortals really is not going to be that significant.
00:14:57.720 | Now, of course, FSAs generally are protected, but that's basically because they're just simply scheduled to expire.
00:15:03.720 | If you are in a situation where you think there's going to be a contentious situation,
00:15:08.720 | I would max out my FSA and try to make maximum use of it.
00:15:12.720 | So know that it is protected, but it's not going to make much of a difference to you.
00:15:17.720 | The final medical account to briefly touch on is the health reimbursement arrangement.
00:15:21.720 | So, of course, your health reimbursement arrangement is a self-insured medical reimbursement plan established with your company
00:15:27.720 | where your company agrees to reimburse you for your medical expenses.
00:15:31.720 | This is one of the more useful tax reduction techniques for people who own the proper company
00:15:36.720 | or who can establish a proper company because you can set it up so that your company pays for virtually all
00:15:45.720 | or many of your medical expenses, and it becomes a completely pre-taxed, tax-free arrangement
00:15:52.720 | where the company is just simply reimbursing you for all of your qualified medical expenses.
00:15:57.720 | It's one of the best ways if you have a situation, for example, you have four children
00:16:02.720 | and all of them are going to need orthodontia and you're trying to figure out how on earth do I pay for this?
00:16:06.720 | Well, the answer is health reimbursement arrangement.
00:16:08.720 | If you do that and you set it up properly, you can set it up so that your company will pay for the orthodontia
00:16:14.720 | and you can pay for those expensive corrective devices with pre-tax dollars,
00:16:22.720 | and you can use this for many other things as well.
00:16:24.720 | So health reimbursement arrangement I think is very, very useful and you should consider it.
00:16:29.720 | Now I think, although I haven't been able to find good information from the attorneys writing on this,
00:16:34.720 | I think this also can be a useful way of protecting some money within your company,
00:16:39.720 | but you're primarily protected simply because those funds are segregated into a separate business entity,
00:16:44.720 | and so this is not a strict exemption planning technique.
00:16:48.720 | Rather, it's more of an entity titling technique where you are paying for your medical expenses
00:16:54.720 | and then being reimbursed for them by your company,
00:16:58.720 | and the funds are protected because they are held by the company,
00:17:02.720 | and your company has a documented health reimbursement arrangement with you.
00:17:06.720 | So I think that is also useful if you're making use of a health reimbursement arrangement,
00:17:10.720 | then that can be a useful way of protecting some assets.
00:17:13.720 | So in summary, health accounts can be useful.
00:17:16.720 | The most important one being an HSA, and if you can qualify for one,
00:17:20.720 | factor it into your asset protection planning.
00:17:23.720 | Let's move on to education accounts.
00:17:25.720 | Education accounts, there are of course many,
00:17:28.720 | but I just briefly want to talk about 529 accounts,
00:17:31.720 | technically known as qualified tuition programs, Coverdell educational savings accounts,
00:17:35.720 | and then briefly on UTMA and UGMA accounts.
00:17:38.720 | There are other types of accounts that can be established.
00:17:41.720 | You could do tax-free savings bonds, etc., but those are very unpopular.
00:17:44.720 | I don't see anybody doing that.
00:17:46.720 | So let's just talk about these big three, beginning again with the most important one
00:17:49.720 | being qualified tuition programs or 529 accounts.
00:17:53.720 | 529 funds can be very, very useful, and they can be protected
00:17:57.720 | both from the claims of creditors and from the claims of a bankruptcy court.
00:18:03.720 | Now, why can 529s be so useful?
00:18:06.720 | First, there's no specified limit on the contributions today.
00:18:10.720 | There's no limit.
00:18:12.720 | Rather, the IRS says the contributions to a 529 account cannot exceed the amount necessary
00:18:18.720 | to provide for the qualified education expenses of the beneficiary.
00:18:22.720 | It is not a strict dollar amount contribution.
00:18:25.720 | This means that you can contribute a lot of money to the 529 accounts.
00:18:29.720 | And with the recent change in the tax code with the--what are people calling them?
00:18:34.720 | At the end of 2017, the Trump tax cuts, I guess.
00:18:37.720 | I don't remember the specific term for that, the label for that.
00:18:40.720 | I think it was the tax art, the TCGA, Tax Cut and Jobs Act of 2017.
00:18:44.720 | One of the major changes in that with 529 accounts is that now you can use a 529 account
00:18:49.720 | not only for qualified upper-level college expenses,
00:18:54.720 | but now you can use a 529 account for your private school expenses from K through 12,
00:19:00.720 | up to $10,000 per year of private school expenses for K through 12.
00:19:06.720 | Previously, that was a major benefit of the Coverdell Educational Savings Account.
00:19:11.720 | Now it's also a major benefit for the 529 account.
00:19:14.720 | Well, you do the math.
00:19:16.720 | If you imagine that you can establish an account with $10,000 per year with over 12 years,
00:19:23.720 | that's $120,000 of undergraduate expenses--of primary and secondary school expenses right there.
00:19:33.720 | And then additionally, you have now college, potentially undergraduate and graduate-level work
00:19:38.720 | that can be accumulated in a 529 account.
00:19:40.720 | You could very conceivably accumulate hundreds of thousands of dollars in a 529 account
00:19:45.720 | without worrying about ever maxing out whatever that means when the IRS says
00:19:49.720 | that your contributions to the account cannot exceed the amount necessary to provide
00:19:52.720 | for the qualified education expenses of the beneficiary.
00:19:56.720 | Now in addition, the other limitation on a 529 account is the idea that
00:20:01.720 | your contributions to that account represent a completed gift.
00:20:05.720 | Now in estate planning, this is very useful because in order for you to make a transfer
00:20:09.720 | out of your estate, you have to make a completed gift.
00:20:13.720 | And a completed gift generally means that you surrender control over the asset.
00:20:18.720 | If I make a completed gift to you, I have to give you property,
00:20:21.720 | and I can't have or exercise any control over that account.
00:20:24.720 | 529 accounts are an interesting scenario because since the IRS ruled that a contribution
00:20:29.720 | to a 529 account is a completed gift, it qualifies for helping people to transfer money
00:20:34.720 | out of their personal taxable estate for estate tax purposes,
00:20:39.720 | but they can still control the beneficiary on the account.
00:20:43.720 | So I could make a gift to a 529 account that I own, and I can make my grandson
00:20:48.720 | the beneficiary of that account, but then two years later I can decide to make--
00:20:52.720 | or I can make my son the beneficiary, but then two years later I can make my grandson
00:20:55.720 | the beneficiary on the account.
00:20:57.720 | And so 529 accounts have a very useful role in estate planning.
00:21:01.720 | But the limitation on 529 accounts is because it's a gift, and a completed gift,
00:21:05.720 | you're subject to the gift tax rules.
00:21:07.720 | But 529 accounts qualify for a special election that you can make
00:21:10.720 | wherein you can contribute five years' worth of your annual exclusion amount
00:21:15.720 | into the account.
00:21:17.720 | And so of course in 2019, the annual exclusion amount, which any person can give
00:21:21.720 | to any other person without filing a gift tax return, without any taxes whatsoever,
00:21:25.720 | is $15,000, which means that any individual can contribute up to five years of that,
00:21:31.720 | $75,000, into a 529 account for a specific beneficiary.
00:21:37.720 | And of course that limit is per beneficiary.
00:21:40.720 | And then of course you can split the gifts for father and mother, or grandparents
00:21:44.720 | if they choose to split their gifts.
00:21:46.720 | So any person can contribute up to $150,000 today into a 529 account
00:21:53.720 | for one individual beneficiary.
00:21:55.720 | And so if you have multiple children or if you have multiple grandchildren,
00:21:58.720 | you can do $150,000 per for yourself.
00:22:02.720 | And of course if your grandparents, your parents, whoever is going to make the gift,
00:22:05.720 | the point is you can do that.
00:22:07.720 | And that's without ever coming up against a lifetime exclusion amount.
00:22:10.720 | And then of course, if we add to that the fact that even if you do contribute
00:22:14.720 | more than $150,000 to the account, you still, in today's world,
00:22:19.720 | have an $11.4 million lifetime exclusion amount for your total gifts.
00:22:23.720 | So yes, you would file the return and start to accumulate those gifts made
00:22:27.720 | under that $11.4 million lifetime exclusion amount,
00:22:31.720 | but you very conceivably could transfer $300,000 into an account.
00:22:35.720 | If you needed to, you just file the appropriate gift tax return.
00:22:39.720 | And it's a very rare person, especially not a mere mortal in today's world,
00:22:43.720 | who is going to go up against the $11.4 million lifetime exclusion amount
00:22:47.720 | per individual, $22.8 million lifetime exclusion amount for a couple.
00:22:54.720 | So we've got huge options here in where the 529 can be very, very useful.
00:22:59.720 | So the 529 account can be a wonderful account.
00:23:02.720 | It allows you to put lots of money into it, lots of money into it now,
00:23:07.720 | and it can be used for very useful things such as education expenses.
00:23:12.720 | Education expenses are usually the primary expense that wealthy people
00:23:16.720 | want to fund because they know that if you can educate a person well,
00:23:19.720 | then they can figure everything else out in their life.
00:23:22.720 | So now that you can use it for primary, secondary, private school expenses
00:23:25.720 | to the tune of $10,000 per year and college expenses and graduate school expenses,
00:23:30.720 | you've got a major opportunity here.
00:23:32.720 | And with the flexibility of 529 accounts to change the beneficiary
00:23:35.720 | or to distribute the money out in times going by, there are huge benefits here.
00:23:39.720 | So it's very much in our interest to know,
00:23:42.720 | are 529 accounts protected from the claims of creditors?
00:23:48.720 | And the answer is, of course, it depends on your state law
00:23:54.720 | and partly on the federal bankruptcy code.
00:23:56.720 | So my state, Florida, does protect explicitly and clearly 529 accounts.
00:24:02.720 | Florida protects Coverdell educational savings accounts, protects 529 accounts.
00:24:07.720 | It protects even Hurricane Savings accounts.
00:24:10.720 | So there's all kinds of protection possible in your state.
00:24:16.720 | So this means if you're the resident of a state that protects 529 accounts
00:24:21.720 | and if you have educational savings goals for your children,
00:24:25.720 | things like private school tuition, things like college tuition,
00:24:29.720 | and if you've had an event, a liquidity event where you have a lot of money,
00:24:35.720 | you should seriously consider making contributions to a 529 account
00:24:39.720 | because you can use it to protect those dollars
00:24:45.720 | for something that's very important to you.
00:24:47.720 | If you're paying private school tuition for three or four children
00:24:51.720 | and you're paying that each year and you have a liquidity event
00:24:55.720 | and you're planning forward for college,
00:24:56.720 | you should seriously consider making some big, big, big contributions
00:25:00.720 | to the 529 account because there's so much flexibility
00:25:04.720 | on your ability to get it out of the account if you ever need to.
00:25:07.720 | There's so much flexibility with your ability to change beneficiaries
00:25:10.720 | and to have it protected from creditors can be a major useful thing
00:25:16.720 | for you to do to fund one of your primary goals.
00:25:19.720 | Now what about bankruptcy?
00:25:21.720 | So in this case, it depends on the details.
00:25:24.720 | Now in the Federal Bankruptcy Code, specifically,
00:25:28.720 | 529 plan funds are excluded from the property of the bankruptcy estate.
00:25:34.720 | So that means that the bankruptcy trustee and creditors cannot collect
00:25:37.720 | from the fund under the Federal Bankruptcy Code.
00:25:40.720 | But there are specific limits that are important.
00:25:43.720 | First, the beneficiary of the account must be your child, stepchild,
00:25:47.720 | grandchild, or step-grandchild.
00:25:50.720 | So you can't just set up a 529 fund for yourself,
00:25:53.720 | file bankruptcy, and protect the money.
00:25:55.720 | Also here, the details of when you actually make the deposits
00:25:59.720 | are a big, big deal.
00:26:01.720 | Under the federal laws, any deposit made within 365 days
00:26:06.720 | before your bankruptcy filing is not protected.
00:26:09.720 | Deposits made between 365 days and 720 days prior to your bankruptcy filing
00:26:15.720 | are exempt of up to $6,225 per beneficiary.
00:26:20.720 | And any deposit made over 720 days before filing bankruptcy is exempt.
00:26:26.720 | That's the federal laws.
00:26:27.720 | Your state may have different laws.
00:26:29.720 | You should research your particular state.
00:26:31.720 | The point is, from the perspective of asset protection,
00:26:34.720 | 529s can be very, very useful.
00:26:37.720 | And long-term listeners to the show will know that I do not like 529 accounts
00:26:42.720 | as a way for relatively poor people to just set aside $100 a month for education.
00:26:49.720 | I think that's a silly strategy.
00:26:50.720 | You're not going to save a month, and the tax savings are going to be insignificant.
00:26:55.720 | But for wealthy people who have a liquidity event or who can put a lot of money up front,
00:27:01.720 | I think 529 accounts have a huge potential for benefits.
00:27:05.720 | Now, big drawback of 529 accounts, limited on your investment choices.
00:27:10.720 | So you're either limited to if you're involved in a prepaid tuition plan,
00:27:14.720 | that, of course, is extremely limiting, and that's only going to be for college expenses,
00:27:18.720 | or you're limited to whatever funds your particular state has chosen in your state's plan.
00:27:23.720 | Here, you would have to, of course, analyze it carefully to understand whether or not your state
00:27:28.720 | will give you the state tax deduction.
00:27:31.720 | If your state provides for you with a state income tax deduction on 529 accounts,
00:27:35.720 | you'll have to analyze what state you can invest in and analyze those investment options.
00:27:40.720 | If you used a different state's funds, you may have a better choice,
00:27:43.720 | but still you're going to have relatively mainstream funds.
00:27:47.720 | That's a big drawback of 529 accounts.
00:27:49.720 | But with this asset protection perspective, if the shoe fits,
00:27:53.720 | if you have those private school tuition for K-12 planned for yourself,
00:28:01.720 | and/or if you are contributing money for college expenses and you plan to pay for retail prices for college, etc.,
00:28:09.720 | a 529 account is a very attractive tool given the creditor protection.
00:28:13.720 | Now, if only in the future we can get it to switch and also cover homeschool expenses,
00:28:18.720 | I will become a much less grudging fan of 529 accounts.
00:28:22.720 | Unfortunately, it's still to this day you can't use 529 accounts for homeschool expenses.
00:28:26.720 | Now let's go to Coverdell Educational Savings Accounts.
00:28:29.720 | Basically, everything's about the same.
00:28:31.720 | The only problem, of course, is your contribution limits to a Coverdell Educational Savings Account
00:28:36.720 | are much, much smaller.
00:28:37.720 | So you can only contribute $2,000 per beneficiary per year.
00:28:41.720 | And so it's much harder to accumulate any significant capital in a Coverdell Educational Savings Account.
00:28:47.720 | But generally, the Coverdell Educational Savings Account has the same asset protection purposes as other tools,
00:28:54.720 | and you have the significant flexibility of the distributions from the Coverdell Educational Savings Account.
00:29:00.720 | And remember, of course, the easy transition for an ESA is you can always put it into a 529 account.
00:29:05.720 | If you ever start to reach the age 30 max on an ESA, you can just pop it over into a 529 account and you are covered.
00:29:11.720 | But the Coverdell Educational Savings Account has the big benefit of more flexibility in the investment choices.
00:29:17.720 | So if you are a hands-on investor and you are actively engaging in opportunities for investment
00:29:24.720 | where you have significant upside potential, you're taking risky bets on things that have big, big potential wins,
00:29:33.720 | and you can do a lot with a few thousand dollars, $2,000, $6,000, $10,000, $20,000.
00:29:38.720 | If you can do a lot with that small amount of money, consider a Coverdell Educational Savings Account
00:29:43.720 | because it can help you to fund your educational goals for your children, grandchildren, etc.,
00:29:47.720 | while also protecting those funds from the claims of creditors.
00:29:52.720 | Coverdells are cool. They just always have that brutal problem of not being able to get much money into them.
00:29:57.720 | And I close with a discussion of UTMA, Uniform Transfer to Minors Act, and UGMA accounts.
00:30:03.720 | Now the good news is that UTMA and UGMA accounts are protected from the claims of creditors, generally,
00:30:10.720 | because when you legally contribute and make that UTMA or UGMA election,
00:30:16.720 | you're making a legal transfer of property from yourself to your children.
00:30:21.720 | And so because it's not your money anymore, even though you're the custodian of the account,
00:30:26.720 | your creditor doesn't have access to something just because you're a custodian of it.
00:30:30.720 | The money is legally your child's money.
00:30:33.720 | The problem with a UTMA or UGMA account is I can't make any good argument for their use.
00:30:39.720 | Now like most things, I would imagine that somewhere, somebody could make a good argument for it.
00:30:44.720 | I could imagine that somebody could come up with a list of circumstances, a set of facts,
00:30:49.720 | in which an UTMA or an UGMA account would be really useful and would really be the best solution.
00:30:55.720 | Somebody must be able to do that, in which case if they described that fact pattern to me,
00:30:59.720 | I would say, "Yeah, absolutely, an UTMA or UGMA account is good."
00:31:02.720 | But I don't know what that account, that fact pattern is. I don't know what that argument is.
00:31:06.720 | Because in any fact pattern I can come up with, generally, there are almost always better tools available.
00:31:14.720 | UTMAs and UGMAs have so many disadvantages to them.
00:31:18.720 | Now they have advantages, but they have so many disadvantages to them
00:31:23.720 | that I've never recommended one to somebody.
00:31:26.720 | If you need one, if you can come up with a fact pattern in real life,
00:31:29.720 | where it is actually a good solution for somebody,
00:31:34.720 | at least there you are getting some creditor protection.
00:31:37.720 | But unfortunately, I can't make a strong version of that argument at the moment.
00:31:41.720 | I'd love to hear from you if you can.
00:31:43.720 | That is the extent of the discussion I want to make today on health and education account exemption planning.
00:31:48.720 | Most people don't think about these accounts from the perspective of their asset protection uses.
00:31:53.720 | Most people just think about them as, "Hey, it's allowing me to save money on taxes."
00:31:57.720 | Well, they don't really. For most people, actually save that much money on taxes.
00:32:02.720 | That's why I'm generally negative towards them.
00:32:05.720 | Most people don't need the tax savings, and the tax savings that they get are pretty insignificant.
00:32:10.720 | They just make people feel good because they're stashing some money aside for their kid's education.
00:32:14.720 | But most people who use these accounts and fund them with some silly $200 a month,
00:32:18.720 | you're not getting any major tax savings. It's basically immaterial.
00:32:22.720 | But if you are wealthy and have significant liquidity events,
00:32:26.720 | you can use these education accounts for your own benefits.
00:32:31.720 | You can get a lot of tax benefits if you can pre-fund them and invest at a healthy time.
00:32:36.720 | But if you can pre-fund them, then your earnings are substantial enough where the tax benefits are useful.
00:32:41.720 | And when you add in the creditor protection, asset protection perspective,
00:32:46.720 | and when you add in the estate planning usefulness of them for some people,
00:32:50.720 | now I think you can make a much stronger argument for education accounts.
00:32:54.720 | For health accounts, I think you've just got one more notch in the feather of the...
00:32:59.720 | Was that the right silly thing to say?
00:33:02.720 | One more benefit for health savings accounts, if you can set them up.
00:33:06.720 | Health savings accounts can be really useful tools, and I think that the asset protection perspectives only enhance that.
00:33:12.720 | That's it for health and education account exemption planning.
00:33:16.720 | The next thing in this series is scheduled to be personal property exemptions.
00:33:20.720 | So stay tuned for that when we come back to this series very soon.
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